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CASS 7 Annex 1 Annex 1

G

As explained in CASS 7.6.6 G, in complying with its obligations under CASS 7.6.2 R (Records and accounts), and where relevant 2SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance), a firm should carry out internal reconciliations of records and accounts of client money the firm holds in client bank accounts and client transaction accounts. This Annex sets out a method of reconciliation that the FSA believes is appropriate for these purposes (the standard method of internal client money reconciliation).

  1. 1. Each business day, a firm that adopts the normal approach (see CASS 7.4.17 G) should check whether its client money resource, being the aggregate balance on the firm's client bank accounts, as at the close of business on the previous business day, was at least equal to the client money requirement, as defined in paragraph 6 below, as at the close of business on that day.

  2. 2. Each business day, a firm that adopts the alternative approach (see CASS 7.4.18 G) should ensure that its client money resource, being the aggregate balance on the firm's client bank accounts, as at the close of business on that business day is at least equal to the client money requirement, as defined in paragraph 6 below, as at the close of business on the previous business day.

  3. 3. No excess or shortfall should arise when adopting the alternative approach.

  4. 4. If a firm is operating the alternative approach and draws a cheque on its own bank account, it will be expected to account for those cheques that have not yet cleared when performing its reconciliations of records and accounts under paragraph 2. An historic average estimate of uncleared cheques may be used to satisfy this obligation (see CASS 7.4.19 G (3)).

  5. 5. For the purposes of performing its reconciliations of records and accounts under paragraphs 1 or 2, a firm should use the values contained in its accounting records, for example its cash book, rather than values contained in statements received from its banks and other third parties.

Client money requirement

  1. 6. The client money requirement is either:

    1. (1) (subject to paragraph 18) the sum of, for all clients:

      1. (a) the individual client balances calculated in accordance with paragraph 7, excluding:

        1. (i) individual client balances which are negative (that is, debtors); and

        2. (ii) clients' equity balances; and

      2. (b) the total margined transaction requirement calculated in accordance with paragraph 14; or

    2. (2) the sum of:

      1. (a) for each client bank account:

        1. (i) the amount which the firm's records show as held on that account; and

        2. (ii) an amount that offsets each negative net amount which the firm's records show attributed to that account for an individual client; and

    3. (b) the total margined transaction requirement calculated in accordance with paragraph 14.

General transactions

7. The individual client balance for each client should be calculated in accordance with this table:

    Individual client balance calculation

    Free money (no trades) and

    A

    sale proceeds due to the client:

    (a)

    in respect of principal deals when the client has delivered the designated investments; and

    B

    (b)

    in respect of agency deals, when either:

    (i)

    the sale proceeds have been received by the firm and the client has delivered the designated investments; or

    C1

    (ii)

    the firm holds the designated investments for the client; and

    C2

    the cost of purchases:

    (c)

    in respect of principal deals, paid for by the client but the firm has not delivered the designated investments to the client; and

    D

    (d)

    in respect of agency deals, paid for by the client when either:

    (i)

    the firm has not remitted the money to, or to the order of, the counterparty; or

    E1

    (ii)

    the designated investments have been received by the firm but have not been delivered to the client;

    E2

    Less

    money owed by the client in respect of unpaid purchases by or for the client if delivery of those designated investments has been made to the client; and

    F

    Proceeds remitted to the client in respect of sales transactions by or for the client if the client has not delivered the designated investments.

    G

    Individual Client Balance 'X' = (A+B+C1+C2+D+E1+E2)-F-G

    X

  1. 8. A firm should calculate the individual client balance using the contract value of any client purchases or sales.

  2. 9. A firm may choose to segregate designated investments instead of the value identified in paragraph 7 (except E1) if it ensures that the designated investments are held in such a manner that the firm cannot use them for its own purposes.

  3. 10. Segregation in the context of paragraph 9 can take many forms, including the holding of a safe custody investment in a nominee name and the safekeeping of certificates evidencing title in a fire resistant safe. It is not the intention that all the custody rules in the custody chapter 2 should be applied to designated investments held in the course of settlement.

    2

  4. 11. In determining the client money requirement under paragraph 6, a firm need not include money held in accordance with CASS 7.2.8 R (Delivery versus payment transaction).

  5. 12. In determining the client money requirement under paragraph 6, a firm:

    1. (1) should include dividends received and interest earned and allocated;

    2. (2) may deduct outstanding fees, calls, rights and interest charges and other amounts owed by the client which are due and payable to the firm (see CASS 7.2.9 R);

    3. (3) need not include client money in the form of client entitlements which are not required to be segregated (see CASS 7.4.27 G) nor include client money forwarded to the firm by its appointed representatives, tied agents, 1field representatives and other agents, but not received (see CASS 7.4.24 G);

    4. (4) should take into account any client money arising from CASS 7.6.13 R (Reconciliation discrepancies); and

    5. (5) should include any unallocated client money.

Equity balance

  1. 13. A firm's equity balance, whether with an exchange, intermediate broker or OTC counterparty, is the amount which the firm would be liable to pay to the exchange, intermediate broker or OTC counterparty (or vice-versa) in respect of the firm's margined transactions if each of the open positions of the firm's clients was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the firm's account with the exchange, intermediate broker or OTC counterparty is closed.

Margined transaction requirement

  1. 14. The total margined transaction requirement is:

    1. (1) the sum of each of the client's equity balances which are positive;

    Less

    1. (2) the proportion of any individual negative client equity balance which is secured by approved collateral; and

    2. (3) the net aggregate of the firm's equity balance (negative balances being deducted from positive balances) on transaction accounts for customers with exchanges, clearing houses, intermediate brokers and OTC counterparties.

  2. 15. To meet a shortfall that has arisen in respect of the requirement in paragraph 6(1)(b) or 6(2)(b), a firm may utilise its own approved collateral provided it is held on terms specifying when it is to be realised for the benefit of clients, it is clearly identifiable from the firm's own property and the relevant terms are evidenced in writing by the firm. In addition, the proceeds of the sale of that collateral should be paid into a client bank account.

  3. 16. If a firm's total margined transaction requirement is negative, the firm should treat it as zero for the purposes of calculating its client money requirement.

  4. 17. The terms 'client equity balance' and 'firm's equity balance' in paragraph 13 refer to cash values and do not include non-cash collateral or other designated investments held in respect of a margined transaction.

  5. 17A. A firm with a Part 30 exemption order which also operates an LME bond arrangement for the benefit of US-resident investors, should exclude the client equity balances for transactions undertaken on the London Metal Exchange on behalf of those US-resident investors from the calculation of the margined transaction requirement.1

Reduced client money requirement option

  1. 18.

    1. (1) When, in respect of a client, there is a positive individual client balance and a negative client equity balance, a firm may offset the credit against the debit and hence have a reduced individual client balance in paragraph 7 for that client.

    2. (2) When, in respect of a client, there is a negative individual client balance and a positive client equity balance, a firm may offset the credit against the debit and hence have a reduced client equity balance in paragraph 14 for that client.

  2. 19. The effect of paragraph 18 is to allow a firm to offset, on a client by client basis, a negative amount with a positive amount arising out of the calculations in paragraphs 7 and 14, and, by so doing, reduce the amount the firm is required to segregate.